A Bridge Loan allows you quick access to financing for purchasing properties before the sale of a currently owned property. This is also sometimes called a swing loan, gap loan, or gap financing. Access to fast funding provides an advantage to real estate investors, like you, to buy properties at a discount from the seller in exchange for the convenience and speed of the transaction. Bridge loans leverage your existing equity so you can seamlessly purchase and sell without missing an opportunity for an investment property.
Another common home buying solution is to use a bridge loan to purchase your new home, before the sale of your current one. This type of short-term loan is best for areas where homes sell quickly, especially markets where multiple offers often compete. Bridge loans help you avoid making a contingent offer, which will be less appealing than offers from buyers who already have funds.
There are generally two ways that bridge loans are used. One way is as a way to pay off your current mortgage, putting any excess toward your new down payment. Another is to use your current equity to take a second mortgage to be used for your new down payment.
For example, let’s say the current property value is $200k and $125k is still owed on the mortgage. A bridge loan for 80% of its value ($160k) would pay off the balance with $35k left over. After closing costs and fees (~$5k) the remaining balance of $30k is free to be used for a new down payment.
In a similar example, let’s say the current value of the property is $200k and $125k is still owed on the mortgage. The existing equity is $75k. A bridge loan for 80% of the equity would provide $60k towards the new down payment.